Tony Lofreda a respected Canadian Senator is supporting new legislation called Employee Ownership Trusts. Unfortunately, it is a non-starter.
The only new benefit for company owners is to extend the small business capital gains exemption up to 10 years. Who cares? No real benefit.
The lifetime capital gains exemption (LCGE) allows people to realize tax-free capital gains if the property disposed of qualifies. The lifetime capital gains exemption for qualified farm or fishing property and qualified small business corporation shares is $971,190 in 2023, up from $913,630 in 2022. This requires the owner to sell the Shares and not just an Asset transaction.
An employee buyout requires the owner to finance the transaction. They take all the risks with large “unsecured vendor takebacks” and “earnouts” based on performance. An employee buyout is no different than a highly leveraged buyout.
Any owner that agrees to sell the Shares of the business must have confidence in the employee’s ability to continue running it without their involvement or limited concern.
There is more money and buyers seeking private businesses than anyone can document. No good business with a realistic valuation can not be sold for a good value. Owners can take lots of their cash off the table with a company sale to a strategic buyer, a former business owner, a private equity buyer, a competitor, or any number of buyers that have capital. With a proper sales process and search, any business can be sold.
It is proven that most employees are not able or willing to pledge much or any of their capital. In most cases, they can not cover the legal, accounting, and due diligence fees. These employees will lack the ability to raise additional capital to grow and expand. Most of these businesses remain stagnant.
It sounds like a great idea, but the current structure of Employee Ownership is a smoke screen.
Why should company owners give their employees a gift? Unless there are no other options.
Mark Borkowski
Mark Borkowski is president of Mercantile Mergers & Acquisitions based in Toronto. Mercantile has been selling private mid-market businesses for 36 years.
mark@mercantilema.com, www.mercantilemergersacquisitions.com
https://sencanada.ca/en/sencaplus/opinion/canadas-employee-ownership-trust-model-should-waive-capital-gains-tax-senator-loffreda/
photo credit: Gerd Altmann via pixabay
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